You Don’t Need MoneyPosted on December 7, 2015 by
You don’t always need money to buy real estate…if you know how to use creative financing. Creative financing is a broad term. There are many ways to complete a real estate transaction using creative financing, so many in fact that it would take me at least a full day to teach you all of the tricks of that trade. In this article I am going to cover the two most popular creative financing techniques that I have had the most success with. They are Master Lease Options (Lease Options) and Seller Financing. I created a 400 unit portfolio using creative financing without ever needing a traditional lender like a bank and you can too. It’s really not that hard.
Master lease options (MLO) or lease options are a great way to get started in the real estate business or to limit some of the risk of buying a distressed asset. We use the term master lease options when we are discussing a multifamily property as there is more than one unit involved, therefore the term “Master Lease”. If we are discussing a single family deal then it’s just a lease option. They are basically the same thing and will work the same way.
A master lease option is a set of two contracts. The first is the lease that allows us to “rent” the property with the right to sublet or re-rent the property to a tenant. This gives us control over the operations of the property and the CASH FLOW! With this document we now control the operations of the deal including management. This will allow you to manage it yourself or to hire a management company to do it for you. If there is work that needs to be done to the property you can now get it done under the lease option. If there is bad management you can now hire new management and lease up the place so it makes more cash flow (multifamily). The lease will set a “rent” payment to the seller and it will stay fixed for the life of the contract so you always know what the payment is. Ideally this rent payment will consist of the owners mortgage payment, taxes, and insurance. This will allow the seller to break even and will allow you to keep any positive cash flow!
The option portion of the MLO allows us to set a price for the property and a time frame to pay that price and to complete the closing. For example I may have an option on a property for $100,000 that is valid for 2 years. That “option” portion of the MLO will allow me to buy that property for $100K sometime between now and the next 2 years. No one else can buy it but me and the price never changes. Now I can fix the property up under the lease section of the MLO. Let’s say that after I do the needed repairs, the property is now worth $150,000. I still get to buy it at the original price and keep the $50,000 difference!
Seller financing is also one of my favorite tools. This technique involves the seller acting as the bank. The seller “carries back” a mortgage for the property instead of you going to a bank to get a loan in order to buy the property. You may still need to put a little money down or you may even get 100% financing from the seller. A traditional bank has FDIC guidelines to follow when giving you a loan. The bank will need to see that you have good credit, down payment cash, and that you have enough net worth to qualify for the mortgage. A seller does not have to follow the same guidelines when giving you seller financing. Credit and cash may not play a very big role (if any) in that type of loan. The seller will still get monthly payments and not have the big tax hit of selling the property and getting all that cash at once. They are only going to pay taxes on the part of your mortgage payment that is profit to them. This is a great point to bring up when discussing this with a seller.
Most people at this point want to know “How do I find sellers willing to give me a creative financing deal?” The answer is you don’t. You never go out looking for creative financing or asking agent/sellers to bring you creative finance deals. This can make you seem like you don’t have any money and can’t close unless a seller gives you financing. This will not go over well if you are working with agents. You need to find deals the same way you always have been such as working with realtors or through mail campaigns and advertising.
Once someone has presented you with a deal, you need to analyze the deal to see if the numbers work. If the numbers don’t work (price is too high, repairs aren’t done, etc.) then you decide what type of offer would solve the sellers problems and then make that offer. Notice I said “solve the sellers’ problems?” Solving problems is the key to making a successful creative financing offer. This is also where most people make the biggest mistakes when attempting creative financing. If the seller doesn’t have a problem that you can solve, are they going to agree to creative financing…probably not? The key is finding sellers with problems, communicating the value in your offer and showing them how their problems go away with creative financing. If you can follow those few simple steps you are on your way to building your own portfolio with creative financing or wholesaling many more deals by selling the creative financing contracts that you have. Oh I didn’t mention how to wholesale properties without ever owning them using these creative techniques. Stay tuned for more info on just how to do that!